Corporate Culture and Financial Reporting Quality

Abstract

With the increased focus on corporate culture as an important determinant of organizational behavior and outcomes, we study how corporate culture affects firm financial reporting quality. Relying on the Competing Values Framework (CVF) to define four types of corporate culture, we find that collaboration (competition)-oriented culture firms have lower (higher) financial reporting quality and these effects are incremental to corporate governance and tone at the top. Further analyses support our main findings and suggest that collaboration culture is associated with the likelihood of reporting a material internal control weakness, while competition culture is related to a lower likelihood of an internal control weakness and a restatement. We contribute to the "cultural revolution" led by economics and finance schools of thought and provide empirical evidence that corporate culture shapes financial reporting quality.